In an asset liability transaction (asset deal), business units, assets and liabilities are transferred without the legal ownership of the company itself changing hands. This form of transaction raises complex issues around the transfer of contractual obligations and rights.
Contract transfers in asset deals require careful legal structuring and thorough due diligence to manage risks. Contract parties usually have to give explicit consent to transfer, making the process considerably more complex than in equity transactions, where contracts automatically move with the company.
What is an asset liability transaction and how is it different from a share transaction?
An asset-liability transaction is the transfer of specific business units, assets and liabilities, without transferring the legal entity itself. In an equity transaction, the transferee buys the shares and thus the entire company, including all rights and obligations.
The fundamental difference lies in legal continuity. In a share transaction, the company continues to exist under new owners, so all contracts remain in force automatically. The contracting parties do not legally notice the change of ownership.
An asset deal, on the other hand, creates a new contractual relationship. The buyer does not automatically enter into existing contracts. This requires explicit transfer of contracts, which may require consent from contracting parties. This structure offers buyers more selectivity, but significantly increases transaction complexity.
Which contracts are automatically transferred in an asset-liability transaction?
In an asset-liability transaction, in principle, no contracts are automatically transferred. Every contractual obligation requires explicit transfer or novation, unless there is a transfer of undertaking within the meaning of Section 7:662 of the Civil Code.
Transfer of business occurs when three criteria are cumulatively met: there must be an economic unit, transfer by agreement and preservation of identity according to the Spijkers criteria. These criteria assess factors such as the nature of the business, transfer of tangible assets, value of intellectual property, acquisition of staff, customer base and comparability of activities.
When transfer of undertaking is established, employment contracts transfer automatically, retaining all rights and obligations. Collective agreement provisions remain in force for one year and dismissals due to the transfer are strictly prohibited. However, this automatic transfer does not apply to commercial contracts, so explicit transfer remains necessary.
How do you identify all relevant contracts during the due diligence phase?
Contract identification starts with a systematic inventory of all agreements that are material to business operations. This includes employment agreements, supplier agreements, customer contracts, rental agreements, IP licences, insurance and financing agreements.
The due diligence phase requires a structured data room in which all contractual documentation is organised. Particular attention is paid to change-of-control clauses that may impede transfer or impose additional conditions. These clauses may include automatic termination, review options or consent requirements.
A thorough contract analysis assesses not only transferability but also commercial value and risks. Long-term supplier contracts with favourable terms represent value, while unfavourable agreements may require renegotiation. Identification should include all legal entities within the transaction perimeter so as not to overlook contractual obligations.
What are the legal requirements for contract transfer in the Netherlands?
Dutch law generally requires consent of all contracting parties for contract assignment, unless the contract explicitly provides that assignment is permitted. Article 3:94 DCC regulates the assignment of claims, while debt assignment under Article 6:155 DCC always requires the consent of the creditor.
Assignment of receivables is subject to a duty of disclosure to the debtor, but consent is not required unless the contract explicitly excludes it. Debt assignment, on the other hand, can only take place with the consent of the creditor. Reciprocal agreements often involve both claims and debts, so both regulations apply.
Novation offers an alternative whereby the original agreement is terminated and a new agreement between buyer and contracting party is created. This always requires tripartite agreement, but creates legal certainty. The choice between assignment, debt assumption and novation depends on the contract structure and the willingness of contracting parties to cooperate in the transfer.
How do you obtain consent from contracting parties for transfer?
Obtaining consent starts with a systematic approach to all relevant contracting parties, weighing up the commercial value of the relationship and transfer risks. Critical contracts require early engagement and careful stakeholder management.
The communication strategy should be transparent about the transaction, without disclosing confidential information. Contracting parties want certainty about continuity of service, the financial soundness of the buyer and the preservation of commercial terms. A clear presentation of the buyer and its vision for the future can eliminate resistance.
For strategic contracts, it may be necessary to involve the buyer directly in discussions with contracting parties. This shows commitment and provides an opportunity to transfer relationships. For reluctant contracting parties, commercial incentives such as extended maturities or improved terms can help. As a last resort, retroactive effect be considered to ensure contractual continuity.
What are the risks associated with contract transfer in asset deals?
The primary risk in contract transfer is the loss of critical agreements due to contracting parties refusing consent or imposing unfavourable conditions. This can significantly affect business value and threaten operational continuity.
Legal risks include incomplete transfer, where obligations remain with the seller while rights do transfer, or vice versa. This creates complex liability issues. Change-of-control clauses can trigger automatic termination or price adjustments, affecting the transaction value.
Operational risks arise when key suppliers or customers use the transfer to renegotiate contract terms. Timing is crucial: communication too early can cause turmoil, while too late involvement creates resistance. Reputational risks can arise if contracting parties react negatively to the ownership change, which spills over to other stakeholders.
How do you structure warranties and indemnities for contract transfer?
Warranties and indemnities for contract transfers should cover specific risks inherent in asset deals. The seller typically guarantees the completeness of contract lists, the validity of agreements and the absence of material disputes.
Specific contract warranties include confirmation that all material contracts have been identified, that no change-of-control clauses have been triggered and that all necessary consents have been obtained. Indemnifications cover liability for contracts that are not successfully transferred or for claims from the period prior to closing.
The structuring requires careful delineation between seller and buyer risks. The seller bears responsibility for historical obligations and accurate disclosures, while the buyer accepts risks for future business operations. Liability limits and survival periods should be tailored to the nature of contractual obligations and potential claims.
The complexity of contract transfer in asset-liability transactions requires specialist guidance to maximise value and manage risk. Experienced advisers can structure the process and lead negotiations to achieve optimal results. For professional support on your transaction, please contact with us.
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